Exemption regulation for SPVs

Under the Dutch Act on the Supervision of the Credit System, a company that qualifies as a 'credit institution' will either have to apply for a banking licence (for which, among other things, a minimum of own funds amounting to Ecu5 million [US$5.25 million] is required) or be exempted under the Act. In principle, a company qualifies as a credit institution if, in the conduct of its business, it raises monies (for instance through the issuing of debt instruments) to finance the granting of credit facilities and/or investment in assets.

This is a relatively broad definition compared to that applied in many other EU member states in which SPVs are generally exempted from banking supervisory legislation. An SPV established in the Netherlands for securitization purposes will be subject to banking supervision unless it is exempted under the Act.

One of the exemptions already available under the Act applies to companies receiving funds repayable at two years' notice or more from professional lenders only. Such companies are exempted from supervision because professional lenders are deemed to be capable of assessing the financial risks involved in a transaction. However, this exemption has the disadvantage that it only applies to long-term debt instruments. In securitization transactions the receivables acquired by the SPV are very often short-term. The financing of short-term receivables by long-term funds creates a mismatch, which can now be overcome by applying the new regulation.

To provide opportunities for securitization in the Netherlands, the Dutch Central Bank asked the Ministry of Finance to issue an extra exemption regulation under Article 1(3) of the Act, which the Ministry has now promulgated. Under the new regulation (officially referred to as the Amendment dated July 11 1997 Number BGN 97/818-M to the Regulation of February 4 1993 implementing Article 1(3) of the Act on the Supervision of the Credit System), an SPV will not be regarded as a 'credit institution' on condition that:

* it raises short-term monies through the issue of securities to professional market participants only (which includes banks, brokers, pension funds, insurance companies, securities firms, investment institutions, other institutional investors, and other parties such as treasuries and finance companies of large enterprises);

* such securities have a rating from a recognized rating agency; and

* the SPV may only hold assets originating from a pre-defined and homogeneous pool of assets.

A rating from a recognized rating agency should ensure that the securitization transaction is properly structured from a legal, financial and commercial point of view.

The requirement under the third bullet point above means the following. The term 'pre-defined' denotes that the criteria according to which assets are selected as belonging to the pool must be set in advance. The term 'homogeneous' means that the assets must have a common legal basis.

Accordingly, a pool of assets may consist of, for instance, mortgage-backed loans or trade receivables or credit card receivables or insurance premium receivables; but combinations of different types of assets are not permissible. Homogeneity of the assets provides for greater transparency of the transaction.

The two conditions described under the second and third bullet points above will generally not be too burdensome for most securitization transactions; they are usually fulfilled anyway to meet investor demand. The requirement that securities can be issued by the SPV to professional market parties only is, in my view, taking into account that the securities have a rating, an unnecessary and unfortunate restriction. However, it does have the advantage that the issue of securities by the SPV is at the same time exempted from the primary market restrictions under the Dutch Securities Transactions Supervision Act 1995.

In securitization transactions which comply with some but not all of the above conditions, an individual dispensation for the SPV should be applied for from the Dutch Central Bank (Section 1(4) of the Act). The regime for these individual dispensations will hopefully be more flexible than the regime before the new regulation. For instance, for SPVs which raise short-term monies from professional market parties but which do not issue 'rated' securities, an individual dispensation can, under normal circumstances, be expected to be more easily obtainable than under the previous regime.